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THREE ESSAYS ON BOARD STRUCTURE
by
Derek Horstmeyer
A Dissertation Presented to the
FACULTY OF THE USC GRADUATE SCHOOL
UNIVERSITY OF SOUTHERN CALIFORNIA
In Partial Fulfillment of the
Requirements for the Degree
DOCTOR OF PHILOSOPHY
(BUSINESS ADMINISTRATION)
August 2012
Copyright 2012 Derek Horstmeyer

This dissertation is comprised of three essays. ❧ The first essay, titled “Beyond Independence: CEO Influence and the Internal Operations of the Board”, serves to extend our understanding of board control beyond traditional measures of independence. Using a detailed, hand-collected dataset on board sub-structure, I document that the board of directors for the average firm underwent a significant transformation between 1999 and 2005, not in terms of its size or composition (independence), but in terms of the CEO’s participation in the internal decision-making processes of the board. Over this time period, (i) the CEO presided over (had a voting stake in) fewer board meetings; (ii) the fraction of meetings held in independent (outside director controlled) monitoring committees increased over 80 percent; and (iii) the fraction of board-time spent by the CEO in the executive committee decreased 40 percent. Together, these findings suggest that the principal governance reform following the corporate scandals of 2000-2002 was through an alternative channel of ‘independence’ on the board - the reduction in the CEO’s ability to influence board oversight and control the internal operations of the board. Next, consistent with the view that the drastic shift in board operations between 1999 and 2005 was contrary to the preferences of the CEO, I find that CEO power is negatively associated with the fraction of meetings held outside of the CEO’s presence in independent monitoring committees, and positively associated with the fraction of meetings held in the executive committee. In total, the results extend the literature on board structure by highlighting that the governance standards of the modern board are not only defined by the composition and size of the board, but also by its internal operating form. ❧ In the second essay, titled “Monitoring the Monitors”, I address whether the sub-structure of the board has a material impact on the policies and internal governance of the board. Namely, I investigate how the size of the nominating committee and the cross-membership of directors between the nominating committee and other monitoring committees affect the effort level of directors and the self-assessment of the board. Through an examination of compensation, audit, and governance decisions, large nominating committees are at best weakly associated with lower effort/quality of decisions. More significantly, both the size of the nominating committee and the cross-membership between the nominating committee and other committees are negatively related to outside director turnover. This finding highlights the self-evaluation problem faced by large nominating committees and the benefits of such a board feature to directors - outside directors primarily structure large nominating committees to secure their board positions and insulate themselves from turnover. ❧ In the third essay, title “The Internal Governance of the Board”, I detail how the formation and composition of the nominating/governance committee relate to board member characteristics and firm determinants in a manner that is in accordance with the contracting relationship between shareholders and board members. For a sample of NYSE firms over the 2005 to 2009 period, I find that directors who are in high demand and directors who have performed well are more likely to hold nominating committee positions. In addition, firms associated with higher risk levels, and boards structured with a greater number of these high demand and strong performing directors create larger nominating committees to attract and retain their directors’ services. The results serve to address the apparent conflict between the prevalence of large nominating committees and the insulating nature of such a board feature.

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THREE ESSAYS ON BOARD STRUCTURE
by
Derek Horstmeyer
A Dissertation Presented to the
FACULTY OF THE USC GRADUATE SCHOOL
UNIVERSITY OF SOUTHERN CALIFORNIA
In Partial Fulfillment of the
Requirements for the Degree
DOCTOR OF PHILOSOPHY
(BUSINESS ADMINISTRATION)
August 2012
Copyright 2012 Derek Horstmeyer